What do income and expenses change in the balance sheet?
The income and expense account is a fundamental part of bookkeeping. Bookkeeping is a complete record of all financial transactions in a company. With the income-expenditure calculation, a company determines the taxable income from the difference between the business assets at the end of a financial year and those of the previous year. It is increased by the value of the withdrawals and decreased by the value of the deposits or payments. This determination is necessary because otherwise the profit could be influenced by external financial processes that may have changed the business assets. As a rule, almost every company is obliged to draw up a so-called business asset comparison based on profit.
In addition to the liberal professions (freelancers), entrepreneurs who operate their business according to the small business regulation are also excluded from this regulation . If these are not entered in any commercial register, they are exempt from the final balance sheet calculation. Likewise, the annual turnover must not exceed 500,000 euros net, or the profit must not exceed 50,000 euros. If these limits are not reached, the simplified income-expenditure calculation, also known as the income surplus calculation, can be used. Put simply, this calculation determines the profit as the excess of operating income over actual operating expenses. Not only does this not have to be a balance sheet, the double-entry bookkeeping is also completely eliminated with the small business regulation.
Depending on how the operating income and expenses turn out in a financial year, the profit or loss generated changes the upcoming balance sheet.
Business assets and the balance sheet
According to Polyhobbies, the term balance sheet is only an umbrella term for different variants of the company balance sheet. The different variants of a balance sheet include the balance of payments, trade balance , foreign exchange balance, balance sheet, capital account and energy balance. When it comes to companies, however, one usually speaks of a balance of assets or payments.
In order to prepare or evaluate a balance sheet, the principle applies to business assets. The conditions at the time of taxation are decisive for both the valuation and the inventory. For cost reasons, it is advisable to draw up the balance sheet at the end of a financial year. Most companies do this too.
Except for freelancers and small business owners who do not exceed a certain limit in the area of income or annual sales, most companies are therefore obliged to prepare a so-called company result, generally known as the company balance sheet, at the end of a financial year. This determination is made on the basis of an income statement. In the calculation, the income as well as the expenses of the respective financial year are compared. The tax office uses the difference between expenses and income as the basis for tax calculations.
With the help of bookkeeping, the business transactions that occur in the current year are recorded in chronological and factual order. Likewise, all financial processes are recorded according to their effect on profit and assets. As a result of the income and expenditure, the assets as well as the annual balance sheet are constantly changing. So that the overview of the existing finances is not lost, all movements are continuously recorded.
Things to know about the company’s balance sheet
The various receipts for incoming and outgoing invoices that arise in the company are collected as the basis for the postings. The various postings are recorded in a land register and a general ledger. These are later also important for the company’s balance sheet at the end of the financial year. Through this, all account movements and cash payments can be viewed in order to be able to draw up an orderly and complete balance sheet. The company’s income and expenses have a positive or negative impact on the balance sheet. Depending on how high the income is over the entire financial year, the company’s balance sheet is influenced upwards in the area of business assets. Due to the increased business assets, the balance sheet also shows which products or services were more successful than others. Thus, improvements can also be made in the company. For example in production or in the scope of the services offered. In addition, the general profitability of the company becomes visible in the final balance sheet. This means that savings potential can also be identified.
While the income-expenditure account is drawn up for a specific period, the balance sheet must be drawn up for a specific balance sheet date. By directly comparing the closing balances of the different passive and active accounts of the company at the different points in time, the economic development of the company is shown. By viewing the bookkeeping, expenses and income can also be fully traced. In this way, the balance sheet ultimately serves as the basis for determining the operational profit and recording profitability.
